Lululemon Athletica is a retailer in hyperdrive, one of very few that are delivering both double-digit topline and bottomline growth. In third-quarter 2019 reporting, net revenue totaled $916.1 million, up 23% over previous year and income from operations grew 29% to $175.8 million.
CEO Calvin McDonald said that the company’s current momentum will carry over into the fourth quarter after the Thanksgiving through Cyber-Monday weekend broke company records. Company guidance puts LULU on track to reach $3.895 to $3.91 billion in fiscal 2019 revenues, which would be year-over-year growth in the 18.5% to 19% range.
In the earnings call, McDonald also reported strong results from its Power of Three strategic initiative, anchored on doubling the size of its men’s and digital businesses, quadrupling the size of its international business, and continuing to generate double-digit growth in North America and women’s businesses.
“These results keep us firmly on track to deliver on our Power of Three growth plan,” he said. “Our organization is aligned behind these priorities and we are focused on the key strategic pillars the will enable us to lean in and deliver against these goals.”
In advance of the company ’s third-quarter report, Cowen analyst John Kernan released an in-depth report raising its stock price target to $250 by benchmarking Lululemon’s growth prospects to Nike. “Lululemon could be the next Nike,” CNBC reported.
“LULU has a path to $1 billion in annual free cash flow in our model and a 44% ROIC (the highest in softlines retail),” Kernan wrote and credited the company’s future growth on, “Consistent innovation, luxury-like positioning, and a community-based model.”
There is no question that Lululemon is innovative – It’s highly engineered and technically-sophisticated women’s Mapped Out Tight was a hit in third-quarter. And the strength of its luxury positioning is without question too, with a $998 Infinity puffer coat proving its ability to get customers to trade-up.
Chief product officer Sun Choe said in the earnings call, “When we bring newness and innovation into the assortment, price doesn’t appear to be a limiting factor.”
However, the key strategic pillar that sets Lululemon apart from Nike and most every other retailer is its community-based retail model.
And Lululemon is just beginning to leverage community retail with a new membership loyalty program available in only four markets – Chicago, Edmonton, Denver and Austin – and as of yet, only two experiential stores, one in Chicago which opened this past July and its Mall of America store opening in late November.
The experiential store model is described by McDonald as “the pinnacle expression of our vision” and went on to say, Lululemon is, “An experiential brand that ignites a community of people living the sweat life.”
The experiential stores combine a retail store with a fitness “sweat studio” and “fuel bar” for healthy refreshments. In addition, experiential stores offer guests a chance to try-out selected Lululemon “gear” for classes before they buy.
The ties that bind
In retailing circles the term “experiential retail” is as ubiquitous and ambiguous as “omnichannel.” In their overuse, they have lost meaning.
When retailers talk about experiential retail, they see it as the magic bullet to revive traffic in a store or mall. But people have needs beyond just wanting more things to do while shopping. By going deeper into those needs, retailers can go deeper into creating a relationship of loyalty with customers.
“We forget that people are fundamentally animals and as animals, we have a very consistent set of psychological needs,” explains Jono Bacon, an expert on community strategy and leadership and author of People Powered: How Communities Can Supercharge Your Business, Brand, and Teams. Bacon also contributes to Forbes.com on the Enterprise and Cloud team.
“Well-formed, healthy communities serve those basic human needs extremely well. Community is what makes society better and it can make businesses better too,” Bacon believes.
That sense of belonging to a community is the elevated experience that Lululemon is delivering, beyond selling clothes and personal care, or giving them exercise classes or a place for refreshments.
It is also what sets Lululemon apart from Nike. “Nike is edging into community-building, but its business is still anchored to a large extent on big marketing campaigns and paid celebrity endorsers,” Bacon says. “On the other hand, Lululemon has created a much more powerful community through its 1,500 member ambassador program and its user-generated content (USG).”
Lululemon ambassadors are recruited from the local store communities and are authentic influencers-in-chief on the local level. On the other hand, Nike relies primarily on high-profile paid celebrity endorsers, who garner lots of media attention (Colin Kaepernick) with a more top-down, broadcast approach to marketing. By contrast, Lululemon uses a grassroots, bottom-up approach which builds a real feeling of belonging.
“Big companies like Nike want to broadcast to consumers, but the younger generation, in particular Millennials, don’t want advertisements, newsletters, or blogs anymore. They want to interact with the brand and with fellow consumers,” Bacon says.
Because Nike remains fixated on broadcast push marketing, its spending on marketing, estimated by Cowen to be roughly 8% to 9% of sales, far surpasses Lululemon’s. “We note that LULU’s customer acquisition costs are extremely low relative to customer lifetime value – as the brand spends less than any peers on marketing,” Cowen’s Kernan wrote.
Lululemon’s grass-roots marketing, led by local ambassadors and its USG Instagram #TheSweatLife platform with more than 1 million posts, pulls new customers to the brand with authentic people who present attainable images of what living Lululemon’s “sweat life” can help them achieve. Nike’s Michael Jordan and its other super-star athletes are lots of things, but not that.
Power of internal and external communities
For a brand to create an engaged, vibrant community with its customers, it must start by creating an engaged, vibrant community within the organization.
Lululemon has done that, being No. 57 on Forbes World’s Best Employers lists and ahead of Nike at No. 127. Further, Glassdoor puts Lululemon at No. 22 on its Best Places to Work For list in 2020, the third best retailer behind only HEB (No. 17) and Trader Joe’s (No. 14).
“The typical cultural norm in companies today remains ‘command-and-control’ where decisions cascade down the hierarchy. But what strong community-based organizations, like Lululemon, provide is an opportunity for creativity and insight to come from any part of the hierarchy,” Bacon says. “One of the hardest elements in this is for managers to be comfortable allowing members of the community to have some of that power.”
Bacon describes management’s role in building an internal community is to act as facilitators, rather than traditional managers.
“They need to facilitate conversation, facilitate content, and facilitate contribution throughout the organization. It is what gives people pride and satisfaction because they realize the company is not some unchangeable entity. People want to have influence; it is a basic psychological need,” he shares.
Community retail is retail’s next evolution
Lululemon provides a case study in the next phase for retail, which in the current age has evolved from primarily a product to a people business. The existing retail experiential model, where retailers offer engaging in-store experiences of touch, sight, sound, taste, scent, and exploration, is the first step toward people rather than product focused retail. But the next step of retail’s evolution is going to be experiences that bind people into communities.
“I have no doubt that if you look at the trends we are seeing in the market, in terms of brands and in terms of customers needs, that building effective communities and ecosystems is going to be the future of how businesses need to operate,” Bacon says and I concur.